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Are medical malpractice settlements taxable?

It's important to consider tax issues before signing a settlement agreement

Mark Twain said, “The only certainties in life are death and taxes.”

Medical malpractice claims are long ballgames. They require ordering medical records and retaining medical, nursing, and other experts. Then typically filing a lawsuit, going through written discovery and taking oral depositions before taking the case to mediation.

While most medical negligence cases in Texas are resolved by settlement before going to trial, getting to that point takes a substantial amount of time and resources.

In the hustle and bustle of resolving a case through settlement, it’s important to have a focused, experienced medical malpractice attorney to carefully review the final settlement paperwork.

After negotiating for some of our clients, we make sure that, when appropriate, the settlement agreement and release contains language invoking 26 U.S. Code Section 104(a)(2).

This provision from the Internal Revenue Code excludes from gross income: “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.”

Virtually all medical malpractice claims involve personal physical injuries. Compensation for these injuries is not considered gross income and, thus, are tax free, as opposed to compensation for emotional injuries. Similarly, compensation in the settlement for medical expenses are also excluded for gross income.

In many medical malpractice cases, there are multiple allegations and issues. As part of our settlement negotiations, it’s our practice to try to reach an agreement with defendants on why the money is being paid and what the parties believe the tax treatment would be. Although these agreements aren’t 100% binding on the Internal Revenue Service courts,  none of our clients have reported any tax problem.

Finally, we remind our clients that we’re lawyers, not tax professionals, and encourage them to provide a copy of the settlement agreement to their accountant or tax preparer for advice.

If you’ve been seriously injured because of poor health care in Texas, it’s important to hire an experienced Texas medical malpractice lawyer to handle your claim from start to finish.

Robert Painter is an award-winning medical malpractice attorney at Painter Law Firm PLLC, in Houston, Texas. He is a former hospital administrator who represents patients and family members in medical negligence and wrongful death lawsuits all over Texas. Contact him by calling 281-580-8800 or emailing him right now.


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